Bank of Canada holds key interest rate on hold

Postado Janeiro 12, 2019

The bank projects growth in the fourth quarter of 2018 to be 1.3 per cent, compared with its earlier prediction of 2.3 per cent. Growth is expected to be just 0.8 per cent over the first three months of 2019. Canada's economy continues to produce enough jobs to keep the unemployment rate at historic lows, and businesses remain upbeat about investment and hiring plans. These worries among market participants have also been reflected in bond and equity markets.

The drop in global oil prices also impacts the Canadian economy, which is heavily dependent on oil and commodity prices. The Canadian economy has "been performing well overall", however, the central bank is also anxious about the below expected consumer spending and housing investment. Growth is close to potential, employment growth has been strong and unemployment is at a 40-year low.

Consumption and housing investment have also been weaker than expected as lending rates increased. Household spending will be dampened further by slow growth in oil-producing provinces. The Bank will continue to monitor these adjustments.

The bank is now projecting growth to be just 1.7 per cent in 2019, down from its October forecast of 2.1 per cent - but it remains optimistic the economy will begin to strengthen again as early as the second quarter of this year.

The central bank revised down its expectations for the sector, which it now expects to shrink in 2019 after previously forecasting a small gain.

While U.S. stock markets rose recently amid some optimism over trade talks between Washington and Beijing, 2018 ended with the Dow Jones Industrial Average down 5.6 per cent, the steepest decline since the financial crisis, according to the Wall Street Journal.

Oil prices remain about 25 percent lower than in the bank's October Monetary Policy Report due primarily to increased USA oil supply and recent "worries about global demand". This means that as near-term shocks fade, the Canadian economy should get back on track, with some modest inflationary pressures to match. As these transitory effects unwind and excess capacity is absorbed, inflation will return to around the 2 per cent target by late 2019. "The policy interest rate will need to rise over time into a neutral range to achieve the inflation target", the bank said in a written statement.

In explaining its decision last month to leave the rate untouched, the Bank of Canada said the timing of upcoming rate increases would depend on factors such as the extent of the crude-price slump, the ability of corporate investment to pick up its pace and how much room the overall economy still has left to grow without stoking inflation.

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Markets saw no additional hikes ahead of the announcement.

"The pendulum in the market often swings more than the underlying facts on the ground", Avery Shenfeld, chief economist at CIBC World Markets, said by phone.